Bank Forsikring Pension. Annual Report. Alm. Brand. Take good care of what matters most

Transcription

1 Bank Forsikring Pension Annual Report Alm. Brand Take good care of what matters most

2 CONTENTS Contents Alm. Brand in brief Our business model Management s review Financial statements 05 Overview of 2015 results 08 Introduction 10 5-year highlights 11 Outlook for Non-life Insurance 24 Life and Pension 33 Banking 44 Strategy 50 CSR 52 Capitalisation 56 Corporate governance 61 Shareholder information 65 Board of Directors 69 Management Board 71 Statement by the Management Board and the Board of Directors 72 Auditor s report 74 Balance sheet 75 Income and comprehensive income statement 76 Statement of changes in equity 77 Cash flow statement 78 Segment reporting balance sheet 79 Segment reporting income statement 80 Overview of notes 81 Notes 143 Financial statements, parent company 153 Financial ratios 154 Group companies This is a translation of the Danish-language annual report for In case of any discrepancies, the Danish version prevails. 02

3 ALM. BRAND IN BRIEF Alm. Brand in brief Alm. Brand is a Danish financial services group. We carry on business within banking, insurance and pension. We take care of our customers The vision taking care of implies that we take an interest in our customers needs and help them get the necessary understanding and decision-making basis for choosing financial services are attentive to our customers as part of our day-to-day routines so they know that we take an interest in them help and take care of our customers in the best possible way when they find themselves in a new or unexpected situation Our values Ordinary common sense We identify with the customer We keep our promises We manage rules using common sense Mutual respect We listen to our customers We respect our customers experiences We draw on each other s knowledge and experience Holism and proximity We care for our customers We take a holistic approach to the customer s situation We are accessible Will to succeed We set ambitious and realistic goals We develop professionally and personally We create results together Founded Employees Branches and offices Alm. Brand af 1792 fmba , % Alm. Brand was founded by Royal Decree on 29 February years ago. We are some 1,600 employees working at our head office in Copenhagen and in our local offices and branches. We have 25 branches and offices across Denmark supplemented by digital platforms. Our largest shareholder is Alm. Brand af 1792 fmba, which holds about 60% of the shares of Alm. Brand A/S. 03

4 OUR BUSINESS MODEL Our business model We offer supreme customer service and high-quality products covering the full range of our customers financial needs. Private customers Life and Pension Alm. Brand Banking Non-life Insurance Commercial and agricultural customers Benefits Benefits for our customers Benefits for Alm. Brand Supportive group structure All financial solutions consolidated in one place Financial advisory services tailored to the needs of each individual customer Nation-wide coverage with 25 branches and offices as well as online services High quality and customer satisfaction Many customer contact points Synergies in the form of shared functions and knowledge sharing across the organisation Long-term customer relations In-depth knowledge of customer needs, solutions and risks Extensive partnership network across Denmark Strong brand Synergies in the form of shared functions Cost efficiency High employee satisfaction 04

5 OF 2015 RESULTS Overview of 2015 results The performance was significantly better than expected at the beginning of 2015, and the 13% return on equity made the performance highly satisfactory. 174% Payout ratio An ordinary dividend of DKK 1.50 per share and an extraordinary dividend of a similar amount. In addition, a total share buyback programme of DKK 400 million. Performance of the group Alm. Brand posted consolidated profit of DKK 652 million before tax, which was slightly better compared with the most recent guidance. The profit was composed of a DKK 1,001 million profit on forward-looking activities and a DKK 349 million loss on winding-up activities. The Board of Directors recommends payment of an ordinary dividend of DKK 1.50 per share and of an extraordinary dividend also in the amount of DKK 1.50 per share. This corresponds to an ordinary dividend of DKK 260 million and an extraordinary dividend in the same amount. In addition, the existing share buyback programme will be extended until end-february 2017 and increased by DKK 100 million to up to DKK 400 million. The increase of the share buyback programme is subject to the approval of the Danish FSA. This means that Alm. Brand will distribute a total of DKK 920 million based on the 2015 results. The total dividend payout ratio equals 174% of the profit for the year. Non-life Insurance The group s non-life insurance activities reported a highly satisfactory pre-tax profit of DKK 959 million in At a combined ratio of 80.8, the technical result was significantly better than expected. However, the result was lifted by substantial run-off gains, which improved the combined ratio by 8.6 percentage points. Major claims expenses continued to be significantly better than expected in 2015, while weather-related expenses were higher than expected, especially in the fourth quarter. The performance of the underlying operations was satisfactory, but it was not as good as in 2014, reflecting in particular the declining average premiums in a more competitive market. The expense ratio was 16.0, up 0.4 of a percentage point on Costs were impacted by investments in the group s new CRM system. Premiums declined by 0.3%, which was more than expected and due to a more competitive market. Premium income declined in the private customer segment and increased slightly in the commercial customer segment. 05

6 OF 2015 RESULTS Life and Pension Life insurance and pension activities generated a satisfactory profit of DKK 79 million before tax. Pension scheme contributions rose by 5.8%. Regular premium payments increased by 3.8%, which was in line with the target. Moreover, single payments remained at a high level, increasing by 7.3%. Overall, the technical result was satisfactory. The expense result was impacted by higher costs related to growth. The investment return on assets allocated to shareholders equity was adversely affected by the financial market turmoil. The financial markets were very turbulent in 2015, but Life and Pension nevertheless succeeded in increasing the customers collective bonus potential while still offering a high rate on policyholders savings. At 31 December 2015, the bonus potential had increased by DKK 30 million to DKK 942 million, equivalent to a bonus rate of 9.7%. The rate on policyholders savings for 2016 remains at 4.00% for new customers and continues to be among the best rates offered in the market. Banking The bank s forward-looking activities reported a pre-tax profit of DKK 18 million, which was consistent with the most recent guidance. The results were adversely affected by the financial market turmoil. Among other things, the extremely low level of interest rates with negative short-term interest rates was a challenge given the bank s considerable excess liquidity. The underlying level of activity in the bank is high and satisfactory in spite of fierce competition in the banking market as well. The bank increased the number of Pluskunder by 13%, lending to private customers grew by almost DKK 200 million, and the portfolio of Totalkredit loans increased by more than DKK 1 billion. In addition, the number of customers and the volume of business in Financial Markets and Leasing grew. Winding-up activities The bank s winding-up activities reported a pre-tax loss of DKK 349 million. While in line with expectations, this marked a slight underperformance relative to 2014 due to higher impairment writedowns, whereas the operating loss was reduced, in particular as a result of reduced funding costs. Impairment writedowns were impacted by the substantially deteriorated market conditions in the agricultural sector. On the other hand, the mortgage deed results improved, and the bank s lending to commercial customers again led to impairment writedown reversals. Major events Share buyback On 2 December 2015, Alm. Brand launched a share buyback programme of up to DKK 300 million, which will expire at the end of In connection with the financial statements, this programme is extended until end-february 2017 and increased by DKK 100 million to up to DKK 400 million. The increase is subject to the approval of the Danish FSA. The principal shareholder, Alm. Brand af 1792 fmba, will be participating proportionately in the programme, thereby maintaining its current ownership interest. Investing in a new CRM system In 2015, Alm. Brand decided to invest in a new CRM system to be provided by Salesforce. Through an investment of about DKK 100 million scheduled to be made over the next couple of years, Alm. Brand plans to collect, coordinate and use customer data in one combined IT solution that will optimise the service provided to the group s customers within and across the fields of insurance, banking and pension. The goal is for Alm. Brand to retain existing customers and attract more customers by providing even better individual advice and service at a pace and of a quality second to none in the Danish market. The CRM system supports the group s continued focus on customer relations by providing an even better understanding of the customer s individual needs and preferences. Improved knowledge about customers will enable Alm. Brand to provide even better service. Approval of partial internal model In mid-may 2015, Alm. Brand Forsikring submitted an application to the Danish FSA for approval of the company s partial internal model to be used under the Solvency II regime. The model covers the company s non-life insurance risks excluding personal accident and workers compensation risks and the company s natural catastrophe risks. On 4 November 2015, the Danish FSA announced that it had approved the application without any comments and that the partial internal model can be used under Solvency II with effect from 1 January Changes to the Board of Directors At the annual general meeting held on 23 April 2015, Anette Eberhard was elected as a new member of the Board of Directors. She filled the vacancy after Arne Nielsen. Events after the balance sheet date No events have occurred in the period from 1 January 2016 until the date of the financial statements which would significantly change an assessment of the annual report. The winding up of loans and advances was significantly better than expected. Adjusted for losses and writedowns, the winding-up portfolio was reduced by DKK 490 million. 06

7 OF 2015 RESULTS Results 2015 Income by business area INVESTMENTS ETC. NON-LIFE INSURANCE 562 8% 5,043 9% DKKm 5.2% 0.3% DKKm 17% BANKING LIFE AND PENSION % 1,311 DKKm 11% DKKm 5.5% Profit before tax, forward-looking activities DKKm 1,200 1, Earnings per share DKK Total income Profit Return on equity Earnings per share DKKm DKKm 7, % 3.1 before tax DKK 07

8 INTRODUCTION JØRGEN HESSELBJERG MIKKELSEN CHAIRMAN SØREN BOE MORTENSEN CHIEF EXECUTIVE OFFICER A financial services group We are very pleased to note that the Alm. Brand Group achieved a return on equity before tax of 13%, a performance that exceeded our target. 13% Return on equity before tax The group has a target of delivering a return on equity before tax of 10%. We have exceeded our own expectations. In addition to satisfactory operations, the outperformance was driven by gains on prior-year claims that turned out to be less expensive than we had originally estimated. Expenses for major claims were also significantly lower than expected. We were also pleased to see the level of activity increase in In spite of competition intensifying, as had been expected, especially in the non-life insurance market, we maintained our market share and succeeded in attracting more banking and pension customers. Fully in line with our expectations a year ago, macro-economic conditions remained challenging in Throughout 2015, the agricultural sector was hard hit by low prices on meat and dairy products, and the year was also marked by highly volatile financial markets and negative short-term interest rates, which posed a challenge for all players in the financial sector. Final year of our CUSTOMERS FIRST strategy Since 2012, we have been working to incorporate customer service in everything we do. Our efforts have indeed been successful, and we are extremely proud of the way in which our employees have embraced the strategic initiatives. 08

9 INTRODUCTION We have managed to almost double our customer satisfaction ratings from 2012 till today. Our customers are experiencing virtually the same high level of quality no matter what part of Alm. Brand they interact with. The single most important factor setting us apart from the competition is our customer service approach. Besides getting supreme quality and personalised customer service, our customers are now able to engage with their bank, insurance or pension company online an option which is increasingly being demanded by customers. At a time when personal contact is widely being replaced by digital solutions, it is essential that we remain visible to our customers and that we are able to add value for them no matter how they choose to interact with us. Compared with other financial services groups in Denmark, Alm. Brand has a unique position, offering banking, insurance as well as pension products. This gives us the strategic advantage of having a much broader platform for interacting with our customers. In the autumn of 2015, we decided to invest in a new CRM system, which will open up completely new possibilities for our company as well as for our customers. Our CRM system will give us a complete overview of each individual customer s commitments across all Alm. Brand business units. We want our customers to experience that they get attentive and relevant service each time they interact with us. In future, we will be able to offer our customers individually tailored information and offers based on their specific circumstances. Our goal is to consolidate our position more firmly in the minds of our customers, whilst ensuring that they benefit from placing all of their financial business with us. Regulatory burden growing heavier Since the financial crisis, financial sector regulation has been amended extensively. Carrying on business as a financial enterprise is becoming increasingly complex, and we are seeing even quite large financial enterprises coming under pressure from already implemented or pending regulatory requirements. We are strongly positioned to comply with the stricter requirements. Our internal risk model for non-life insurance was approved in 2015, and the Danish FSA s most recent inspections were conducted with satisfactory results. In other words, we are well versed in the regulatory requirements, and being a financial services group we derive great benefit from leveraging our regulatory know-how across all of our business segments. these developments closely over the next couple of years. We aim to strengthen our overall position in the market. Means to achieving this could include collaborating more closely with other companies or making acquisitions. Historically high dividend distribution This year, we will be recommending a total dividend distribution of just over DKK 900 million. This is by far the biggest dividend distribution in the history of our company, and we are making it in spite of the fact that our winding-up activities produced a loss of close to DKK 350 million. Our decision to make such a big dividend distribution is based on an exceptionally strong earnings performance by Non-life Insurance and on our successful reduction of risk in the winding-up bank, which has freed up capital. Through our dividend policy, we want to provide greater dividend distribution predictability for our shareholders. Our goal is to be able to make stable dividend distributions and to adjust our capital structure through share buyback programmes. For 2016, we have recommended payment of an ordinary dividend of DKK 1.50 per share, equivalent to DKK 260 million. Subject to the Danish FSA s approval, the share buyback programme launched in December 2015 will be increased by DKK 100 million to up to DKK 400 million and extended until end-february However, the liquidity of our shares places a limit on how much we can actually distribute through share buybacks, and we have therefore chosen also to distribute an extraordinary dividend of DKK 1.50 per share, equivalent to DKK 260 million. Our employees make the difference Alm. Brand has come a long way since the introduction of the CUSTOMERS FIRST strategy in We owe this achievement very much to our skilled and dedicated employees. Our customers expect more of us, the market is becoming increasingly competitive, and market conditions are changing, but we are confident that our employees will ensure that our customers continue to get the service and experience they expect in future. Jørgen Hesselbjerg Mikkelsen Chairman The increased requirements on financial enterprises may trigger a consolidation wave among the small market players, which, all other things being equal, are the most under pressure from the regulatory burden. We will be monitoring Søren Boe Mortensen Chief Executive Officer 09

10 5-YEAR HIGHLIGHTS 5-year highlights DKKm 2015 Q GROUP Income Non-life Insurance 5,043 1,266 5,058 5,031 4,866 4,772 Life and Pension 1, , Banking ,044 Investment etc Total income 7,578 1,889 7,638 7,320 7,347 7,218 Profit/loss excluding minority interests Non-life Insurance Life and Pension Banking, forward-looking activities Other activities Profit/loss before tax, forward-looking activities 1, Banking, winding-up activities Profit/loss before tax Tax Profit/loss after tax Consolidated profit/loss Consolidated profit/loss before tax Tax Consolidated profit/loss after tax Total provisions for insurance contracts 19,340 19,340 19,449 18,627 19, Consolidated shareholders equity 5,232 5,232 4,847 4,676 4,500 4,202 Share attributable to minority interests Total assets 35,083 35,083 39,078 39,580 42,559 44,913 Average no. of employees 1,557 1,557 1,590 1,585 1,592 1,572 Return on equity before tax (%) Return on equity after tax (%) PARENT COMPANY KEY RATIOS Profit/loss before tax Tax Profit/loss for the year Total assets 5,548 5,548 5,172 4,874 4,711 4,436 Total investment assets 5,478 5,478 5,081 4,772 4,623 4,365 Share capital 1,735 1,735 1,735 1,735 1,735 1,735 Shareholders equity 5,232 5,232 4,847 4,523 4,363 4,089 Payables Return on equity before tax* (%) Return on equity after tax (%) Earnings per share Diluted earnings per share Net asset value per share Share price at 31 December Price/NAV Average no. of shares (in thousands) 169, , , , , ,140 No. of shares at year-end, diluted (in thousands) 172, , , , , ,202 Average no. of shares, diluted (in thousands) 173, , , , , ,140 Dividend per share** Dividend per share, extraordinary*** No. of shares bought back (thousands) Avg. price of shares bought back, DKK Total payout ratio * Return on equity in the parent company is calculated before tax in subsidiaries. **Proposed dividend for the financial year. ***Proposed extraordinary dividend for the financial year. 10

11 OUTLOOK FOR 2016 Outlook for 2016 The consolidated pre-tax profit is expected to be in the range of DKK million. The outlook is based on the assumption that interest rates will remain at the current very low level throughout The group s forward-looking activities are expected to generate pre-tax profit of DKK million, while the winding-up activities are expected to produce a loss of DKK million. The outlook is based on the assumption that interest rates will remain at the current very low level throughout The group has a substantial portfolio of investment assets, and the low level of interest rates is affecting all of the group s business areas. Non-life Insurance The group s non-life insurance activities are expected to generate pre-tax profit of DKK 525 million. The effect of competition will impact premium income in 2016 as well. In an effort to meet the intensified competition, Alm. Brand has introduced a new motor insurance product with increased micro-rating and lower prices. Overall, premium income is expected to decline by about 1-2% in The combined ratio is expected to be about 91. This level is based on an expectation of an underlying combined ratio of about 80, while major claims and weatherrelated claims are expected to impact the combined ratio by percentage points. The expense ratio is expected to be at the level of 16.5%. In 2016, the expense ratio will be adversely affected by the anticipated decline in premium income. Outlook DKKm 2016 Total expected profit Forward-looking activities Non-life Insurance 525 Life and Pension 75 Banking 70 Other activities 50 Winding-up activities 50 to 75 11

12 OUTLOOK FOR 2016 Life and Pension The company expects to generate pre-tax profit of about DKK 75 million in The return on investment assets allocated to equity is not expected to contribute to the profit due to the current very low level of short-term bond yields. Growth in regular premiums is expected to be at the level of 5% in Banking The forward-looking activities are expected to generate pretax profit of about DKK 70 million in The improvement is expected to be driven by growth in Leasing and activities in Financial Markets. After a turbulent start to 2016 in the financial markets, normal returns are expected for the rest of the year. Other activities Other activities, comprising costs and interest related to the parent company, Alm. Brand A/S, are expected to be unchanged relative to Winding-up activities The winding-up activities are expected to post a pre-tax loss of DKK million. The results before impairment writedowns are expected to improve substantially on 2015 as a result of lower funding costs. Moreover, impairment writedowns on agricultural exposures are expected to decline significantly as a result of the considerable impairment writedowns taken in However, developments in the agricultural sector remain subject to significant uncertainty, and a further deterioration of conditions in the agricultural sector could have an adverse effect on the outlook. The bank s winding-up portfolio is expected to be reduced by DKK 200 million in Combined ratio 91 Expected Non-life Insurance result Growth in Life and Pension 5% Expected growth in regular premiums in Life and Pension. Growth in lending 5% Expected net increase in loans to private customers. 12

13 NON-LIFE INSURANCE Financial key ratios Gross premiums 5,043DKKm Combined Ratio 80.8 Profit before tax 959DKKm Non-life Insurance Non-life Insurance is the group s core business, exclusively targeting the Danish market with a special focus on private customers, small and medium-sized enterprises, property owners and administrators, agricultural customers and the public sector. 13

14 NON-LIFE INSURANCE Denmark s 4th largest insurer 300,000 Private customers (approx. 200,000 Pluskunder) 100,000 Commercial and agricultural customers 10.2% Market share Private customers 45% 55% Commercial and agricultural customers 12% 73% 15% 30% of total sales Customer service centres Insurance agents Brokers Provide advisory services to private customers from five regional service centres. Commercial and agricultural customers receive advisory services from two centralised service centres. 63% of total sales Provide advisory services locally from either sales centres or regional offices. New sales are supported by telemarketing departments in five regions. 7% of total sales Supported by a centralised department responsible for preparing quotations and serving brokers. 14

15 NON-LIFE INSURANCE JESPER MØRCH SØRENSEN MANAGING DIRECTOR, NON-LIFE INSURANCE Non-life Insurance Highly satisfactory pre-tax profit of DKK 959 million. An extremely strong technical result, but the market is very competitive. Market According to the Danish Insurance Association s official statistics, the overall market for direct insurance in Denmark was flat from Q to Q Alm. Brand s market share was unchanged at 10.1%, covering small declines in motor insurances and private lines, while commercial lines grew at a fair rate and health and personal accident insurances improved slightly. The market for private lines excluding motor and personal accident insurances increased by 1.5% in 2015 (from Q to Q3 2015), while Alm. Brand s premium income only grew by 0.9%. The market for commercial lines excluding motor insurances increased by 1.3% in the same period, while Alm. Brand s gross premium income grew by 2.0%. Gross premiums in the motor insurance market grew by 2.0% in 2015, while Alm. Brand s gross premium income declined by 1.3% in the same period. In recent years, this market has become significantly more competitive, especially due to medium-sized market players. 15

16 NON-LIFE INSURANCE Private The number of new motor car registrations hit peak again in 2015, for the third consecutive year, at 207,700. Whereas sales of new cars was previously dominated by micro cars, the sale of mini cars, SUVs and large mid-sized cars increased in Cars in the latter segments are typically more expensive to insure, but due to the more competitive motor insurance market, premium income nevertheless declined. In late 2014, the Danish Insurance Association launched an updated version of forsikringsguiden.dk. At 31 December 2015, Alm. Brand had its four main products (contents, houseowner s, holiday home and motor insurance) represented on the website. Alm. Brand expects to have personal accident insurances included on forsikringsguiden.dk by the end of Q Commercial Small and medium-sized enterprises Other than an increase in employment, the market for insurance of small and medium-sized enterprises has not changed to any significant extent in recent years. The Danish business sector remains characterised by weak growth as a result of the general economic slowdown that has characterised Denmark for a number of years. The weak growth is also reflected in the commercial insurance market. The market remained fiercely competitive in Insurers are accepting lower premiums than they did previously in order to attract new customers. There is a general trend that international insurers are focusing increasingly on the Danish commercial insurance market, making the market more competitive. In recent years, the major insurance brokers have focused increasingly on offering standardised insurance terms, making the insurance premium the key competitive parameter for customers in this segment. However, Alm. Brand maintains its focus on offering its customers individual product solutions with respect to both price and terms. However, the trend towards standardised insurance terms may cause market shares to shift over the next few years. Agriculture Alm. Brand is a leading insurance provider to Danish agriculture with an estimated market share of about 30%. Premium income from the agricultural sector has declined in recent years, among other things due to the trend towards larger but fewer farms. The number of farms is currently under 38,000, having declined by approximately 1,000 farms per year in recent years. For a number of years, Alm. Brand has worked with individual farmers concerning claims prevention, conducting, among other things, electrical and thermographic surveys of farm buildings with a view to reducing potential fire hazards. Vacant buildings are converted from replacement-cost insurance to fixed-sum insurance, which for the customer means lower insurance payouts but also lower premiums because of the lower risk. Product development Alm. Brand is continuously working to develop new products and adjust existing products in order to offer its customers special benefits. Alm. Brand increasingly involves existing and prospective customers in the work to design its products. Youth insurance Since July 2014, Alm. Brand has offered a youth insurance to young people under the age of 28. In order to ensure adequate insurance cover, the youth insurance is sold as a package solution consisting of both contents and personal accident insurance at a particularly attractive price. Business travel product Alm. Brand launched a new business travel product in the third quarter of The product has been developed in collaboration with customers from all commercial and agricultural segments, which became involved early in the development process with a view to composing the most value-generative covers for business travellers. As a result of these efforts, Alm. Brand now has a product providing optional coverage of alternative return journey, among other things. Wage guarantee As a new feature, Alm. Brand has offered wage guarantee cover for Pluskunder of Alm. Brand Bank and Alm. Brand Forsikring since 1 October This is a unique product in that it is also available to customers who are not members of an unemployment fund. Moreover, all customers get improved cover compared to a wage guarantee with an unemployment fund, including coaching by a career consultant with a view to quick reemployment. 16

17 NON-LIFE INSURANCE New motor insurance In mid-february 2016, Alm. Brand launched new motor insurance products for its private, agricultural and commercial customers. The products are based on three different basic covers: Liability insurance combined with full comprehensive motor insurance Liability insurance combined with partial comprehensive motor insurance, which is intended for older cars Liability insurance only All three basic covers may be combined with a variety of supplementary covers, including cover of mechanical damage or parking damage or cover of costs in connection with the return of a leased vehicle, allowing the insurance to be tailored specifically to the needs of each individual customer. The new products ensure that Alm. Brand has an attractive offering for all customer segments in the important motor insurance market. Traffic behaviour and motor insurance risk Alm. Brand has launched a project, the objective of which is to collect data and investigate connections between driving patterns and the risk of claims. Customers are given access to data collected about their own driving habits with the aim of making them aware of their driving patterns and traffic behaviour. The project is based on specific customer cases in which the concept has already been tested. This will make the customers aware of the advantages of the collaboration, as they will be able to influence their insurance premium directly through their driving patterns. Combined ratio Combined ratio, underlying business Weather-related claims net of reinsurance Major claims net of reinsurance Reinstatement premiums Run-off result net of reinsurance Combined ratio Developments in the underlying business were less favourable in 2015 than in previous years, particularly due to a higher claims frequency. Falling average premiums also detracted from the performance. As a result, the underlying combined ratio was 79.4, which was in line with expectations, as the target is about 80. Premiums Gross premiums declined by 0.3% to DKK 5,043 million in 2015, which was less than expected. The lower level of premiums was due to intensified competition, especially on motor insurances. However, the retention rate remains high in both the private customer segment and the commercial customer segment. Emergency response vehicle As a natural part of the company s focus on providing good customer service, Alm. Brand has acquired an emergency response vehicle, which can be deployed to any area of Denmark within a couple of hours. With this vehicle, Alm. Brand is able to bring its claims processing and customer service functions directly to customers in areas affected by claims. The vehicle will be used for major claims events in which many customers in a given area are affected, for example due to flooding after storm surges, sudden thaw or cloudbursts. Premiums Performance The group s non-life insurance activities generated pre-tax profit of DKK 959 million in 2015 (2014: DKK 651 million). The performance was highly satisfactory and better than expected. The performance resulted in a return on equity of 38% before tax (2014: 30%). The technical result was DKK 964 million (2014: DKK 744 million), equivalent to a combined ratio of Compared with 2014, the performance was affected in particular by a significant increase in run-off gains. Adjusted for these, the combined ratio was 89.4, against an expected normal level of % Fire & property, Private 26% Fire & property, Commercial 27% Motor insurance 6% Workers compensation 12% Health and personal accident 6% Other insurances 17

18 NON-LIFE INSURANCE 80.8 Combined ratio Lifted by run-off gains and few expenses for major claims. Increasing claims frequency in the underlying business. Claims experience The claims experience (gross claims ratio less net reinsurance ratio) was 64.8% (2014: 69.8%). Excluding run-off gains, the claims experience was 73.8%, which was 2.5 percentage points higher than in The claims experience was in line with expectations. Weather-related claims Denmark was hit by a number of weather-related loss events in 2015, the eight largest of which are expected to result in total costs of just over DKK 250 million. The windstorm Gorm, which hit Denmark on 29 November 2015, was the largest of the eight loss events, and Alm. Brand expects to receive a total of about 7,500 claims from this windstorm alone. Alm. Brand s reinsurance programmes cover a substantial part of the risk associated with such major weatherrelated loss events. The windstorm Gorm was the only single loss event in 2015 large enough to trigger compensation under the reinsurance cover. But due to the large number of weather-related loss events, particularly in the fourth quarter, Alm. Brand received compensation on its frequency cover for windstorm claims. Weather-related claims expenses net of reinsurance amounted to DKK 221 million in total (2014: DKK 210 million), affecting the combined ratio adversely by 4.4 percentage points, which was slightly above the normal level of 3-4%. Moreover, reinstatement of reinsurance cover related to the windstorm Gorm affected the combined ratio adversely by 0.3 of a percentage point. Major claims Net of reinsurance, major claims totalled DKK 269 million, which was DKK 23 million less than in Major claims affected the combined ratio by 5.3 percentage points, which was significantly better than the expected normal level of 7-8%. Underlying business Although the level increased in 2015, the underlying claims experience remained better than the target. The increase was due to a higher claims frequency, which was only partly offset by a slight decline in average claims. Falling average premiums also detracted from the performance. The number of reported claims was 2% higher than in 2014, and the claims frequency increased on a number of products in 2015, especially on commercial liability and workers compensation. Moreover, the trend of an increase in the number of travel claims continued in 2015, while the number of theft and burglary claims was seen to decline. The interest rate used for the discounting of provisions declined further in the first half of 2015 to a historically low level with short-term interest rates moving into negative territory. In the second half of the year, interest rates climbed back to a level equivalent to the second half of Overall, interest rate developments increased the claims experience by 0.6 of a percentage point. Run-off result Run-off gains net of reinsurance were extraordinarily high in 2015 at DKK 435 million (2014: DKK 131 million). The 2015 run-off gains mainly derived from the personal insurance lines workers compensation, motor liability and health and personal accident insurance and to a minor extent from change of ownership insurance. Changes to the provisioning models for workers compensation and motor liability alone resulted in a combined run-off gain of about DKK 250 million in Costs Total costs amounted to DKK 807 million in 2015 (2014: DKK 787 million), equivalent to an expense ratio of Compared to 2014, the expense ratio was 0.4 of a percentage point higher, among other things due to the investment in a new CRM system. Net reinsurance ratio The net reinsurance ratio for the year was positive at 4.8 (expense), against a negative ratio of 0.9 in 2014 (income). The net expense for the year was due to the fact that only one weather-related loss event triggered a small compensation under the reinsurance cover, while the net income in 2014 related to an upwards adjustment of the expected claims from the 2013 windstorms Allan and Bodil, which were fully covered by the reinsurance programme. Net of run-off on prior-year claims, the net reinsurance ratio was 4.4 in

19 NON-LIFE INSURANCE Investment result After transfer to insurance activities, the investment result was a loss of DKK 5 million (2014: DKK 93 million loss). Before transfer to insurance activities and expenses, the investment result was a profit of DKK 35 million (2014: DKK 19 million loss). The investment result was not satisfactory. The investment assets are distributed on Danish and international bonds, mortgage deeds and equities and a small portfolio of properties. The goal is to achieve a satisfactory financial risk/return ratio. The overall goal is to keep the market risk low. The financial risk may be adjusted by using derivative financial instruments. Bonds etc. consist of a bond portfolio placed in Danish government and mortgage bonds, a small volume of credit bonds and derivative fixed-income instruments. The government and mortgage bonds predominantly have the highest rating, whereas the credit bonds are in the investment grade segment. The return on bonds etc. is limited due to the low level of interest rates. The interest rate risk on mortgage bonds is largely offset by the interest rate risk on provisions supplemented by interest hedging arrangements. In 2015, liquidity in the mortgage credit market was affected by stricter regulation in the financial sector, which had an adverse impact on the return. Over the year, the hedging of the company s liabilities was roughly neutral. In December 2014, Alm. Brand Forsikring acquired mortgage deeds from Alm. Brand Bank. The transaction includes an option agreement protecting Alm. Brand Forsikring against credit losses, as Alm. Brand Forsikring can sell back mortgage deeds if the mortgage deed debtors default on their payment obligations. The return on the mortgage deeds is affected by changes in the level of interest rates as well as by prepayments. In spite of an increase in the share of prepayments in 2015, mortgage deeds made for a better investment than Danish bonds over the year. The equity exposure of Non-life Insurance consists of equity futures on international equity indices and a small proportion of strategic equities that support the business. This makes it possible to quickly change the equity exposure in line with expectations for market conditions. The company increased its exposure to global equities in The property portfolio consists of a few investment properties, which generated a satisfactory return. Investment assets Investment return DKKm Bonds etc % % Mortgage deeds etc % 3 0.3% Equities 3 2.3% 5 7.2% Property 1 6.5% 0 1.6% Total return on investments % % Administrative expenses related to investment activities Capital gains related to the discounting of technical provisions Interest on technical provisions Return on investments after technical interest % Bonds 16% Mortgage deeds 2% Equities Note: Equities are stated inclusive of exposure to futures contracts 19

20 NON-LIFE INSURANCE Approx. 14,000 Weather-related claims In 2015, Denmark was hit by both windstorm, cloudburst and snow load events. Eight major weatherrelated events resulted in total claims of DKK 250 million. Private The technical result excluding technical interest was a profit of DKK 365 million, equivalent to a combined ratio of The performance was highly satisfactory. Premium income declined by 1.4% to DKK 2,605 million, which was slightly more than expected. The customer retention rate remained high in 2015 but continued on a slightly declining trend in a more competitive market. Competition was particularly fierce within motor insurances, but other lines were also affected, as terminations tend to involve entire household insurance packages. Both the inflow and outflow of customers increased relative to 2014, reflecting a higher customer turnover rate in the market. The decline in the underlying claims ratio seen in recent years stabilised. However, travel insurance saw an overall increase in the claims frequency of about 10% due to the discontinuation of the Danish public travel health insurance scheme. The scheme was discontinued with effect from 31 August 2014, and Alm. Brand opted in that connection to expand the cover free of charge to ensure that customers have the same coverage as they did before. On the other hand, the declining trend in the number of burglary and theft claims continued in 2015 to currently stand at the lowest level in more than six years. The expense ratio increased by 0.3 of a percentage point to 17.7, primarily due to lower premium income and the investment in a new CRM system. The run-off result net of reinsurance produced a gain of DKK 144 million (2014: DKK 59 million). The run-off result was mainly attributable to gains on motor liability claims and to a minor extent to houseowner s and change of ownership insurances. The net reinsurance ratio was 2.3 (expense) in 2015, against a negative ratio of 0.9 in 2014 (income). In spite of the several different weather-related loss events in 2015, the net reinsurance ratio was only slightly impacted by the windstorm Gorm, whereas the 2014 level was attributable to upwards adjustments of the estimates relating the windstorms Allan and Bodil in the fourth quarter of The very competitive market also impacted the rest of the private customer market. By way of example, Alm. Brand sold over 10% more contents insurances compared with 2014, but at a lower average premium. Private The claims experience excluding run-off gains was 74.0% (2014: 69.2%). Despite the increase, the claims experience was slightly above target in Net of reinsurance, total weather-related claims amounted to DKK 84 million (2014: DKK 59 million). Weather-related claims affected the combined ratio by 3.2 percentage points (2014: 2.2 percentage points). The number of major claims increased in the first four months of the year compared with the same period of 2014, but the frequency subsequently declined to the 2014 level. For the year as a whole, claims expenses net of reinsurance increased to DKK 84 million from DKK 59 million in 2014, impacting the combined ratio for 2015 by 3.2 percentage points (2014: 2.2 percentage points). Overall, major claims expenses were slightly below the level expected at the beginning of the year. DKKm Gross premium income 2,605 2,642 Gross claims expenses 1,718 1,805 Insurance operating expenses Profit/loss on reinsurance Technical result* Run-off result Gross claims ratio Net reinsurance ratio Claims experience Gross expense ratio Combined ratio *) Excluding technical interest 20

21 NON-LIFE INSURANCE Commercial DKKm Gross premium income 2,438 2,416 Gross claims expenses 1,307 1,774 Insurance operating experience Profit/loss on reinsurance Technical result* Run-off result Gross claims ratio Net reinsurance ratio Claims experience Gross expense ratio Combined ratio *) Excluding technical interest based on data from all segments of Alm. Brand s portfolio. The system is designed to provide a more precise assessment of the risk associated with each individual customer, enabling Alm. Brand to offer customers the best terms and prices. The run-off result net of reinsurance produced a gain of DKK 291 million (2014: DKK 72 million). The gains were mainly attributable to workers compensation insurance, as the company s new model for calculation of claims provisions provides a somewhat lower provisioning level for prior-year claims than the previous model did. Building insurance and motor liability lines also generated run-off gains. The expense ratio was 14.2 (2014: 13.6). In spite of the increase in 2015, the expense ratio was slightly better than expected at the beginning of the year. The net reinsurance ratio for the year was 7.6 (expense) in 2015, against a negative ratio of 1.0 in 2014 (income). The net reinsurance ratio was impacted by the windstorm Gorm, whereas the 2014 level was attributable to upwards adjustments of the estimates relating the windstorms Allan and Bodil in the fourth quarter of Commercial The technical result excluding technical interest was a profit of DKK 601 million (2014: DKK 338 million), equivalent to a combined ratio of The performance was highly satisfactory. The significant improvement on 2014 was driven in particular by significant run-off gains on private insurance lines as well as on building insurances. Moreover, the major claims experience was exceptionally good. The underlying business was on a par with last year. Gross premium income increased by 0.9% to DKK million. The customer retention rate has been at a stable, high level for the past 18 months, which is very satisfactory in light of the competitive market. The claims experience excluding run-off gains was 73.2 (2014: 74.8). Net of reinsurance, total weather-related claims amounted to DKK 137 million in 2015, corresponding to a claims ratio of 5.6 (2014: 6.2). Net of reinsurance, major claims totalled DKK 185 million (2014: DKK 233 million). Overall, major claims expenses were significantly below the expected level. In particular, the number of major claims on agricultural buildings was well below the expected level. The results of building insurances for commercial and agricultural customers, respectively, still failed to meet the group s profitability requirements. Alm. Brand has developed and implemented a new profitability assessment system Major events Many weather-related loss events in 2015 Denmark was hit by a number of major weather-related loss events in 2015 especially in the fourth quarter: One in the first quarter, two in the third quarter and five in the fourth quarter. In January, the windstorms Dagmar and Egon hit Denmark s western regions and westerly coasts the hardest, and in November and December the windstorms Freja and Helga hit northern Jutland. On 29 November 2015, the windstorm Gorm swept across central parts of Denmark, turning out to be the most severe windstorm since Bodil in December In August and September, Denmark was hit by cloudbursts, causing both lightning and water damage. In December, heavy rainfall over a short period time resulted in extensive water damage. In addition, a heavy snowfall in November caused a number of snow load claims. Alm. Brand expects these weather-related loss events to result in approximately 14,000 claims and total claims expenses payable to customers of about DKK 250 million. New provisioning model for workers compensation insurance In the first quarter of 2015, Alm. Brand implemented a new provisioning model for the calculation of claims provisions on workers compensation insurance. The new model improves the possibilities of regularly monitoring claims provisions at a more detailed level. Increasing transparency in relation to the cash flow on provisions, the model facilitates improved management of index and interest rate risk. 21

22 NON-LIFE INSURANCE New act on higher retirement age affects workers compensation benefits In December 2015, the Danish parliament adopted an amendment to the Danish Social Pensions Act which raises the retirement age from 67 years to 68 years for people born in 1963 or later. As a result, people in this age group who either have been awarded or will be awarded regular benefits due to loss of earning capacity are eligible for workers compensation benefits for one year more than under the previous rules. As a consequence of the amendment, Alm. Brand has increased the premium on workers compensation insurance with effect from 1 January to cover additional expenses for future claims. Alm. Brand also expects to incur additional claims expenses for workers compensation claims already reported. This increase was included in the claims provisions as at 31 December Approval of partial internal model In mid-may 2015, Alm. Brand Forsikring submitted an application to the Danish FSA for approval of the company s partial internal model to be used under the Solvency II regime. The model covers the company s non-life insurance risks excluding personal accident and workers compensation risks and the company s natural catastrophe risks. On 4 November 2015, the Danish FSA announced that it had approved the application without any comments and that the partial internal model can be used under Solvency II with effect from 1 January Solvency II and new Executive Order on financial reports The Solvency II rules were introduced with effect from 1 January Alm. Brand Forsikring implemented the principles behind the new rules and began using the company s internal model for the calculation of the solvency requirement already at year-end 2012, which has given the company extensive experience with Solvency II dynamics. The Danish FSA has issued a new Executive Order on financial reports for insurance companies and multi-employer occupational pension funds applicable as from 1 January Apart from presentational changes, the new provisions also imply an amendment to the measurement of technical provisions and introduce new concepts such as risk margin and profit margin. Moreover, a new yield curve to be determined by EIOPA (the European Insurance and Occupational Pensions Authority) will be introduced. Alm. Brand Forsikring has obtained permission from the Danish FSA to use volatility adjustment, which is an add-on to the yield curve from EIOPA. The add-on reduces liabilities and makes it easier to hedge yield curve fluctuations. The profit margin expresses the expected future earnings from insurance contracts entered into but not yet expired, i.e. the insurance contracts to be covered by premium provisions. The risk margin expresses the risk allowance which a third party would in principle demand in return for taking over the technical provisions including the associated risk. Separate risk margins must be calculated for premium provisions and claims provisions. Premium provisions must still cover claims which have not yet been incurred but for which the company has assumed the risk. However, the part of the provision attributable to the expected future earnings on premium provisions will be recognised in the item Profit margin, and a risk margin must also be calculated for premium provisions to cover the uncertainty related to claims incurred after the balance sheet date. Moreover, the rules stipulating when a policy is to be recognised in premium provisions and the related balance sheet items have also been amended. In future, policies must be recognised as from the date an insurance contract is entered into. The previous rules stipulated that policies should be recognised as from the effective date of the policy. Moreover, all premium provisions must be discounted in future. Previously, discounting was only required for lines for which the impact was material. Claims provisions must still cover compensation for claims incurred but not yet fully settled at the balance sheet date. The item is to be calculated as a best estimate of such claims. 22